Lesson 1.1: Flow of funds within an Organization through and from Enterprise and the Role of the Financial Manager

1. Lesson 1.1
Flow of Funds within
an Organization
through and from
Enterprise and the
Role of the Financial
Manager

2. The Role of
Financial
Manager

3.  Financial managers perform data analysis and
advise senior managers on profit maximizing
ideas.
 Financial managers are responsible for the
financial health of an organization.
 Financial managers produce financial reports,
direct investment activities, and develop
strategies and plans for the long-term
financial goals of their organization.

4. Financial Managers typically:
 Prepare financial statements, business activity
reports, and forecasts,
 Monitor financial details to ensure that legal
requirements are met,
 Supervise employees who do financial reporting
and budgeting,
 Review company financial reports and seek ways
to reduce costs,
 Analyze market trends to find opportunities for
expansion or for acquiring other companies,
 Help management make financial decisions

5. This is an example of a financial statement that financial managers are
responsible for preparing and interpreting.

6. Financial managers do tasks that are
specific to their organization or industry.

7. What are the four functions of a VP for finance or CFO?
Financing
01
Operating
03
Dividend Policies
04
02
Investing

8. Financing decisions
This include making
decisions on how to fund long
term investments and working
capital which deals with the day
to day operations of the
company.

9. Capital structure refers to how much of your
total assets is financed by debt and how much is financed
by equity.

10. Assets = Liabilities + Owner’s Equity
To be able to acquire assets, our
funds must have come somewhere.
Two kinds of funds:
 Funds financed by equity
 Funds financed by debt

11. Try to analyze!
Are there ideal mixture of debt and equity across corporations?
The answer is None.
The mix of debt and equity, varies in different corporations
depending on management’s strategies. It is the responsibility of the
Financial Manager to determine which type of financing (debt or
equity) is best for the company.

12. Investments
Short term investment
- decisions are needed when
the company is in an excess
cash position.
Long term investment
- should be supported by a
capital budgeting analysis which
is among the responsibilities of a
finance manager.
Capital budgeting analysis is a
tool to assess whether the
investment will be profitable
in the long run.

13. Operating Decision
It deal with the daily
operations of the company. The role
of the VP for finance is determining
how to finance working capital
accounts such as accounts receivable
and inventories. The company has a
choice on whether to finance working
capital needs by long term or short
term sources.

14. Sources that can be use in financing a company:
Short term sources
- are those that will be
payable in at most 12 months.
Long term sources
- mature in longer periods. Since
this will be paid much later, the
lenders expect more risk and place
a higher interest rate which makes
the cost of long term sources
higher than short term sources.

15. Dividend Policies
- cash dividends are paid by
corporations to existing shareholders
based on their shareholdings in the
company as a return on their investment.
Some investors buy stocks because of the
dividends they expect to receive from the
company. Non-declaration of dividends
may disappoint these investors. Hence, it
is the role of a financial manager to
determine when the company should
declare cash dividends.

16. Two conditions that must exist before a company may be able to
declare cash dividends:
2. The company
must have cash.
1. The company
must have enough
retained earnings
(accumulated
profits) to support
cash dividend
declaration.

17. Summary:
Capital investment decisions are long-term corporate finance decisions
relating to fixed assets and capital structure. Decisions are based on several inter-
related criteria. Corporate management seeks to maximize the value of the firm by
investing in projects which yield a positive net present value when valued using an
appropriate discount rate in consideration of risk. These projects must also be financed
appropriately. If no such opportunities exist, maximizing shareholder value dictates that
management must return excess cash to shareholders (i.e., distribution via dividends).
Capital investment decisions thus comprise an investment decision, a financing
decision, and a dividend decision.
Management must allocate limited resources between competing
opportunities (projects) in a process known as capital budgeting. Making this
investment decision requires estimating the value of each opportunity or project, which
is a function of the size, timing and predictability of future cash flows.
Achieving the goals of corporate finance requires that any corporate
investment be financed appropriately. The sources of financing are, generically, capital
self generated by the firm and capital from external funders, obtained by issuing new
debt or equity.

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